Argentina faces first slump since 2001

Industrial activity dropped 4.2 percent in April as the vehicle industry came to a halt

After a decade of growth, the government faces a decline this year as industrial output falls and a high inflation rates hits consumer spending and new investment.

The economy had grown steadily since recovering from a 2001-2003 debt crisis and it expanded three percent last year but it stumbled in the fourth quarter and could slid into a recession at the start of this year. That is now expected to drag on for most or all of 2014.

Industrial activity dropped 4.2 percent in April compared to the same month last year, according to the government’s INDEC statistics bureau.The decline was largely due to a 20 percent drop in the vehicle sector as more than 15,000 workers have been suspended due to lower sales on the domestic market and fewer exports to Brazil, the main buyer of Argentina’s production.

A devaluation of the peso currency and a hike in interest rates in January worsened a new weakness in consumer spending, a pillar of the economy that had helped it withstand external shocks like the 2009 financial crisis.The measures have hit spending and prompted economists to revise downward their forecasts for 2014.

The consensus view now is that the economy will shrink around one percent, the first full-year contraction since the debt crisis, when the country defaulted on US$100 billion. Output contracted 4.4 percent in 2001 and a stunning 10.9 percent the following year but since then has grown at an average of 6.2 percent a year.

“We were already doing badly but the devaluation of January has made the situation even more critical,” said former Central Bank chief Rodolfo Rossi. “There is no confidence among firms, and workers are losing ever more purchasing power.”

Retailers are feeling the squeeze.

“Sales have plummeted, especially for anything that is not a basic need, like furniture,” said Débora Rosenfeld, working in a Buenos Aires store that sells chairs, tables and sofas. Its revenue has fallen 30-40 percent this year.

“No one has come in the store today,” she said one afternoon this week, adding that the owner was moving the business to a cheaper location. Rosenfeld is a trained architect but gave up her junior position during the last crisis to get a higher-paying retail job just so she could pay the bills.

Giving up beef

The shift in policies in January was aimed at restoring the economy to better health in the medium term. But it’s causing pain now and critics say it may also fail because the government has not cut its own spending.

The 20 percent devaluation — the biggest in a decade — stoked inflation as people, who often think in dollars because they lack faith in their own currency, raised prices to adjust to the new exchange rate.

It also made the cost in pesos of imported goods and big-ticket items like houses that are sold in dollars jump. Opposition economists see inflation hitting at least 30 percent this year.

Salaries are not keeping up so real wages fell at one of the fastest clips since 2002 in the first quarter, think tank Ecolatina said.

“It’s becoming more difficult to keep your head above water each month, the wages aren’t enough,” said Antonella Cardoso, working at a sales stand in a Buenos Aires shopping centre.

“When you go to the supermarket, the money that used to buy enough food for a week will now only buy enough for two days,” the 28-year old mother of young twins said.

The hike in prices is even hitting beef consumption in a country where asado is part of the national identity. Consumption fell more than five percent in the first quarter of this year, Agriculture Ministry data shows.

“I eat less beef, and more chicken and pork because it doesn’t cost as much,” said 54-year old city resident Carlos Molina. “You have to change your diet.”

Attempts to tame prices and shore up dollar reserves, such as a hike in interest rates and cut in energy subsidies, are also weighing on consumers.

“The measures have cooled consumption, which was the motor of economic growth for the last seven years,” Ecolatina said in a research note. “We do not expect consumption to grow in 2014.”

Industry woes

Declining real wages, expensive credit and a new tax on mid-range and high-end autos that has sent prices soaring has hammered domestic demand for cars, the country’s main manufacturing industry.

New legislation implemented from January levies a 50 percent tax on cars worth more than 220,000 pesos (US$27,286) and 30 per cent on models valued at more than 125,000 pesos (US$15,504).

A salesman at a BMW showroom in an upmarket district said prices had jumped 60 percent. “Sales have fallen a lot. We are just holding out until customers get used to the new prices,” he said, noting he had not had a single customer that day.

Demand is also cooling in Brazil, the main destination for Argentine auto exports. To top it off, import restrictions are making it difficult for manufacturers to acquire key parts.

Car factories are slashing output and putting thousands of workers on shorter work hours, driving a decline in the industrial sector that has been in recession for three quarters.

Many analysts say the government must lift the restrictions and economic imbalances they say are choking the economy and take even bolder reforms to help revive business.

“What they did was consequential and will impact growth this year,” said Alberto Ramos at Goldman Sachs. “But in terms of adjustment we are not even close to where we need to be.”